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Divesting and optimising

In this article, Andrew Broad discusses companies that are focusing on their core business, selling off anything that’s surplus to requirements or no longer fits with the central strategy.

We’ve been looking closely at the paths that businesses are taking in their pursuit of growth – and what makes each of these strategies successful. Of course every business has its own unique circumstances, but four broad strategies (which are not mutually exclusive) dominate: investing to grow, divesting and optimising, pivoting, and doing more with what you have.

Focussing on the core

Those of us who remember the 1980s hold in our heads a repository of forgotten words, like ‘Pacman’ and ‘yuppie’. ‘Conglomerate’ (in the western world at least) is another. The 1980s was the point when the conglomerate business model started to wane in developed economies. Today, the mantra is focusing on the core – do what you’re good at, and divest the rest. It’s an increasingly popular strategy – but doing it well takes care, planning and preparation.

“Today, the mantra is focusing on the core – do what you’re good at, and divest the rest. It’s an increasingly popular strategy – but doing it well takes care, planning and preparation.”

Prioritising and optimising the core business and stripping out what’s surplus to requirements makes sense for a growing number of companies. Our research found that only 14% of companies could say that none of their functions had become misaligned with strategy in the past year – and divesting releases resources to invest in expansion or new products or services. But there are points along the way where value can leak and value creation opportunities can be missed. So how do you plug the gaps?

The ultimate aim is to achieve the highest possible price for what you’re divesting, and extract the maximum possible value from what’s left. Let’s start with the divestment...

Put every piece of value on the table

There are two elements to the value of an asset put up for sale – its value, and its potential value. If the potential value isn’t reflected or articulated by the seller, it’s as good as lost because no-one else will factor it into the price. There is nothing more galling for a company than selling a business and then seeing it sold on a few years later for a much greater price – and if that happens, it’s because the original seller didn’t identify the value creation opportunities embedded in the business (or did, and did nothing to articulate it to bidders). 

Maximising the divestment price is about understanding where value lies in a business and preparing it for sale with this in mind – and we have seen companies increase the selling price of divested businesses by millions. There are two broad approaches:

Identify value creation opportunities, and implement them before you sell. 

Identifying and implementing a value creation strategy in a business before it’s sold increases its EBITDA - and that’s real value that buyers will pay real money for. It stands to reason that if a buyer is prepared to pay a multiple of, say, 8x EBITDA for the business, increasing EBITDA beforehand will pay exponential benefits.

Identify value creation opportunities, and tell the story. 

Implementing a value creation strategy takes time (typically two to three years) but there is a short-term alternative. If a seller identifies opportunities for value creation in the business and evidences and articulates them clearly, a buyer will have confidence (supported by due diligence) that they will be able to increase EBITDA in the future – and will be prepared to pay more. This approach is often overlooked; according to our research, 84% of divestors believe they could do better in presenting upside opportunities to buyers.

Putting together a value creation plan for a divestment means, essentially, thinking like a private equity (PE) investor, and it makes sense even if PE isn’t the target audience (although it has to be said that attracting PE interest, and therefore widening the potential bidder pool, is rarely a bad thing). The point is that PE investors are looking for value creation opportunities, and for recognition that any risks in the business that could have a negative impact on the value of the business in the future – such as a neglected IT system – have been addressed. 

Some value creation opportunities will be relatively obvious – the value of a builders’ merchant that lacks an ecommerce platform, for example, will suffer in a market where its competitors are investing heavily in technology. Others may seem relatively minor but are no less important in the value creation jigsaw.

Don’t neglect what’s left

Maximising the value of divestments is only half the battle. Selling has consequences for the remaining business – and these need to be addressed if the core business is to maximise value creation.

Mitigate stranded costs. 

Stranded costs – the recurring costs that linger after a business has been sold – are a well-known drain on the value of deals. The revenue that the business generated has gone, but many of its costs will remain. So form a plan to mitigate those costs before the sale is completed. How were shared resources divided before, and what should that look like now? Has the divestment had an impact on purchasing power or economies of scale?  For example, careful planning - up front - of people transfer approaches and attraction strategies can mitigate the ‘double whammy’ of needing to recruit for the divested business and then making redundancies in the remaining part. 

Realign what’s left. 

Selling a business has an impact on business functions. What could and should be done differently after the divestment? Could the finance function be downsized? Is outsourcing now a more efficient option? An Execution Managed Services (EMS) solution could be used to support and improve non-core activities, helping businesses focus on the right value creation priorities.

Reallocate resources. 

Where should capital, people, and management be focused in order to maximise value creation in the remaining core business? 

People and skills. 

A divestment is often the trigger for talent to leave an organisation. A compelling story – an ambitious business plan that sets out plans for growth, the opportunities for the leaner business to grasp new opportunities – will be essential in persuading them to stay. 

Divesting and optimising is not just about managing costs or raising cash – it’s about cost, capital and strategy. A well thought-through value creation strategy – a compelling story, compellingly told – not only maximises the value of divestments, but sets out a roadmap for creating value in the core business that remains.

“A well thought-through value creation strategy – a compelling story, compellingly told – not only maximises the value of divestments, but sets out a roadmap for creating value in the core business that remains.”

  

The value bridge

Knowing where to start when it comes to Value Creation can be difficult. We use a framework called the value bridge to help our clients visualise and work through the core foundations that will enable them to create value in their business, value that makes the difference, whatever their strategy or situation. Watch our value bridge animation to find out how, together we can help you create value.

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Value bridge

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Contact us

Andrew Broad

Andrew Broad

Partner, Value Creation in Deals, PwC United Kingdom

Tel: +44 (0)7803 858592

Christopher Temple

Christopher Temple

UK Value Creation leader, PwC United Kingdom

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